Transcript Economics: The Framework for Business

Chapter 2: ECONOMICS
The Framework for Business
© 2009 South-Western, a division of Cengage Learning
WHY ECONOMICS MATTER
• Economics represent the flow of
resources
• Forces that impact your business and
personal life
– Better Decisions
– More Money
© 2009 South-Western, a division of Cengage Learning
• The economy is financial and social
system
• Represents flow of resources through
society (from production to
consumption)
• Economics is about choices
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CONSUMER CHOICES AND
ECONOMICS
What choices have you made because of
increasing gas costs? What would you do
differently if the price now doubled? How
would your choices impact various
businesses?
© 2009 South-Western, a division of Cengage Learning
MACROECONOMICS VS.
MICROECONOMICS
Same Scene, Different Take
Macroeconomics
Country’s Overall
Economy
Microeconomics
Consumers
Families
Businesses
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ALLOCATING RESOURCES
Free Market
Planned Economies
Capitalism
Socialism
Mixed Economies
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Communism
CAPITALISM
• The Free Market:
– Private Ownership
– Economic Freedom
– Fair Competition
– Innovation and Hard Work
• Businesses offer Value to:
– Customers
– Employees
– Suppliers
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PLANNED ECONOMIES
• Communism
– Public Ownership of Enterprise
– Strong Central Government
• Socialism
– Government Control Key Enterprises
– Higher Taxes
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MIXED ECONOMIES
• Market and Planned Economies don’t meet
all needs
– Under pure market economies, the old, young,
sick and the environment could suffer
– Planned Economies will not create enough value
• As a market dominant economy, the US
government still owns/supports enterprises
– Postal Service
– Universities
– Parks
– Libraries
© 2009 South-Western, a division of Cengage Learning
MIXED ECONOMIES
“
What industries should
be regulated? Why?
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P.J. O’Rourke,
political satirist, journalist, writer
“
As Mixed Economies
become The Story of the
Future, how much
government intervention
is too much?
When buying and selling
are controlled by legislation,
the first things to be bought
and sold are legislators.
RIGHTS OF CAPITALISM
• The right to own a business and keep
after-tax profits.
• The right to private property
• The right to free choice
• The right to fair competition
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DEGREES OF COMPETITION
• Pure Competition
• Monopolistic Competition
• Oligopoly
• Monopoly
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• Pure – many competitors with identical
product where consumers have all power
• Monopolistic Competition – many
competitors who have control over price
because brand loyalty
• Oligopoly – handful of competitors selling
similar products
• Monopoly – single producer controls industry
© 2009 South-Western, a division of Cengage Learning
FREE MARKET
FUNDAMENTALS
• Supply and Demand
• The Foundation of the Free Market
– How much can we make/sell?
– How much will consumers buy?
– At what price?
• Interaction of buyers & sellers
– Impact prices
– Entrance of competition
© 2009 South-Western, a division of Cengage Learning
SUPPLY: HOW MUCH TO
PRODUCE? CHARGE?
• Supply: the relationship between
the price of a good and the quantity
sellers are willing and able to offer
for sale.
– Sellers tend to supply a greater quantity
as the price rises
• Supply curve: a graph of the supply
relationship.
– The supply curve slopes upward to the
right showing that quantity supplied
increases as price rises
© 2009 South-Western, a division of Cengage Learning
DEMAND: HOW MUCH WILL
BUYERS PURCHASE?
• Demand: the relationship
between the price of a good
and the quantity buyers are
willing and can afford to buy.
– When price falls, consumers
tend to buy more
• Demand curve: a graph of
the demand relationship
– The demand curve slopes
downward showing that quantity
demanded increases as price
falls
© 2009 South-Western, a division of Cengage Learning
EQUILIBRIUM PRICE
• Forces of supply and
demand drive
equilibrium price
• The point where supply
and demand intersect
• Equilibrium price is the
market price.
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COST OF AN ICE COLD COKE
• Coke took supply and demand too far....
• …install thermometers in their vending
machines
• Consumers balked at paying more for a
cold Coke on a hot day.
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EVALUATING THE ECONOMY
Gross Domestic Product
Unemployment Rate
Consumer Price Index
Producer Price Index
Productivity
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Unemployment
• Frictional – job changes
• Structural – unemployment because
skills are not needed
• Seasonal – time of year
• Cyclical – economic
cycle layoffs and hires
© 2009 South-Western, a division of Cengage Learning
GOVERNMENT PLAYS A ROLE
IN MANAGING THE ECONOMY
The goal is to find:
– The right mix of
freedom and control
– The right balance
between taxing and
spending
– And the right growth
rate for the supply of
money
© 2009 South-Western, a division of Cengage Learning
MANAGING THE ECONOMY
• Fiscal Policy
– Taxation
– Government Spending
– Controlled by Congress/Budget Process
• Monetary Policy
– Supply & Demand of Money
• Cost of Credit
– Controlled by the Federal Reserve (FED)
• Seven Member Board
• Chairman
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FEDERAL GOVERNMENT
REVENUE & EXPENSES
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MONEY: M1 AND M2
M1 Money Supply - all
currency—paper bills and metal
coins—plus checking accounts
and traveler’s checks.
M2 Money Supply - all
M1 plus most savings accounts,
money market accounts, and
certificates of deposit (low
risk savings vehicles with a
fixed term).
© 2009 South-Western, a division of Cengage Learning
BANKS MULTIPLYING MONEY
The bank must hold 10% of
your deposit based on
You deposit $5,000
Federal Reserve
Requirements.
The bank loans Anne $4,500
Anne buys a car from Jake for $4,500
Jake deposits the $4,500
Although you still have $5,000, the money supply has
increased to $9,500
© 2009 South-Western, a division of Cengage Learning
FEDERAL RESERVE
• Conduct Monetary Policy:
– Changes in the Discount Rate
– Changes in Reserve Requirement
– Open Market Operations
• Participates in Check Clearing
Process
• Banking Services for Government
and other banks
© 2009 South-Western, a division of Cengage Learning
More on the Fed
GOVERNMENT’S ROLE?
“
For a free market to function humanely, it
must find a way to provide a decent
standard of living for everyone, including
the desperately poor, the very young, the
very old, and the sick.
“
© 2009 South-Western, a division of Cengage Learning
What do you think?
Country
Corporate
Personal
Sweden
28%[
28.89%59.09%
United States
15-39%
(federal
income)
0-12% (state
income)
Canada[5]
29.5-35.5%
Payroll
32.42%[
VAT/GST/Sal
es
25%. 12%
and 6% for
some goods.
0-35%
(federal
0-10.25%
income)
15.3%(federal (state and
0-10.3%
payroll)
local sales
(state income)
tax)
15-29%
(federal) 417.95%
(provincial)
United
Kingdom [23]
21-28%
0,20,40%
India
30-40%
10-30%
5% (GST) 010%
(provincial
sales taxes)
23.8%
(National
Insurance)
17.5%
12.5%
US ECONOMIC GROWTH
Housing Statistics:
1950
2003
Average size of new homes
983
2,330
New homes with 4 bedrooms
1%
37%
New homes with 2.5 or more baths
1%
56%
© 2009 South-Western, a division of Cengage Learning
Source: Home Big Home, Carleton College Voice, Winter 2006
THE BUSINESS CYCLE
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LOOKING BACK
• Why is supply and demand the driving force in a
free-market system?
• What is the difference between planned
economies and a free-market system?
• Why is there a trend toward mixed economies?
• How is the economy measured and controlled?
• What is the role of the Federal Reserve?
© 2009 South-Western, a division of Cengage Learning